Embraer Bets on U.S. Sales Surge and “G-Jets”

Unfazed by a fast-depleting order backlog, Brazilian manufacturer Embraer is betting on a sales surge in North America for its E-Jet airliners. This expectation is partly due to expectations of long-awaited reforms to U.S. “scope-clause” trade union restrictions based on aircraft size that currently prevent regional airlines from operating with crews from their associated mainline carriers.

Meanwhile, Embraer’s design office is also busy defining a re-engining program for the popular regional jets, along with recently announced interim improvements to the aircraft. These are being pursued through the G2 program, which should offer fuel-burn reductions by next year.

As of late March, the E-Jet backlog had dwindled to $14.7 billion, its lowest level in more than five years and representing only 240 aircraft. The 100-seat E190 accounts for the largest proportion of that total, at 150 airplanes. Meanwhile, 44 of the smaller E175s, 39 E195s and just seven E170s accounted for the remainder.

At a press briefing ahead of the 2012 Farnborough International Airshow, Paulo Cesar Silva, Embraer’s commercial aviation president, shrugged off the suggestion that this might be a matter of concern. “We are quite bullish regarding the North American market,” he said, while admitting that there have been very few sales there over recent years. “The U.S. market is more sustainable [now], so it is time for U.S. airlines to buy new aircraft. This has started already.”

Indeed, North America accounted for only 20 percent of 2011 revenues at Embraer. By contrast, it accounts for 35 percent of the customer base (including the installed base and the backlog). In addition, an estimated 33 percent of U.S. flights operated by narrowbodies carry 105 passengers or fewer. Therefore, Embraer is hoping that airline efficiency-drives will lead to sales in the 70- to120-seat segment occupied by the company’s regional jets.

The company is also eagerly awaiting “scope clause” relief at U.S. airlines. For example, American Airlines’ Chapter 11 bankruptcy protection predicament is expected to cause the proportion of its jets in the 61- to 90-seat segment to increase to far above the current 29 percent of its fleet. A similar trend is forecast with carriers such as Delta and Continental (which is now merged with United Airlines).

All this combines into a “huge opportunity,” in Silva’s words. Embraer predicts a global market for 3,110 jets in the 61- to 120-seat category between 2011 and 2020. Extended to the 30- to 120-seat segment and to the 2011-2030 period, the forecast predicts that one third of the deliveries will take place in North America.

Another reason for optimism is the greater proportion of sales accounted for by aircraft lessors. Last year, lessors accounted for 64 of a total 124 E-Jets ordered. “They see E-Jets as very desirable aircraft,” said Silva. Separately, asked about cancellations, he answered that he has not seen any–only delivery deferrals. Meanwhile, Silva does not see turboprops as a threat. “It is a small market; last year’s high level of sales was atypical,” he asserted, referring mainly to record sales by Europe’s ATR group.

In last year’s revenues, commercial aviation accounted for 64 percent, while executive jets and defense activities represented 19 and 15 percent, respectively. Despite the growth of the military and executive jet branches, Embraer expects commercial aviation to remain its main pillar.

G-Jets on the Horizon

The manufacturer is to introduce gradual improvements on its E-Jets over the next three years, before the 2018 entry into service of the E-Jets “G2,” as Embraer is designating the re-engined variants (although “G-Jets” could be a name that catches on). A fuel-burn improvement package is to be unveiled this year. It will consist mainly in new winglets and some aerodynamic clean-up, according to Silva.

Not all models will enjoy the same efficiency gain. The E175’s fuel burn will be cut by 5 percent, while the E190’s consumption will decrease by 3 percent. The improvement will be progressively available on new-built E-Jets. “One percent next year and more in 2014,” Silva said, but no retrofits will be offered.

Coming soon, too, are increased maintenance intervals, as well as structural and prognostic health management (both next year). In 2015, unspecified “advanced avionics features” are due to be incorporated, along with a new cabin interior (the latter will be available for retrofit).

“The G2 will be an evolution of the E175, E190 and E195,” Silva clarified. The slow-selling E170 is excluded. Therefore, instead of 70 to 122 seats, the E-Jet G2 will cover capacities from 78 to 122 seats.

With the G2, “we want to maintain our competitive advantage over narrowbodies,” Silva explained. Embraer is claiming today’s E-Jets have an edge, in some segments, over the current Airbus A320 and Boeing 737 families. To keep it competitive with the re-engined A320neo and 737 MAX, the E-Jets also need less thirsty engines.

This has prompted Embraer to talk to Rolls-Royce and General Electric, Silva said, seeking at least 10-percent lower fuel burn. The E175G2 could be fitted with GE’s in-development NG34 turbofan, while CFM Leap-Xs could power the larger models: the E190G2 and E195G2.

Other changes are not defined yet. Embraer’s executives want to select an engine first and go from there. A larger fan, for example, may call for a longer landing gear. Designing a new wing is also in the cards–maybe two wings, as one may not meet the needs of the entire family.

By early next year, Embraer is planning to start offering the E-Jets G2 on the market, and full program launch is expected in the second half of 2013. The manufacturer had considered launching larger aircraft–direct competitors to Airbus and Boeing products–but decided against it in late 2011. “We could find no good business case,” Silva acknowledged. Nevertheless, he is confident that an all-new Embraer narrowbody would have been more efficient than the re-engined A320 or 737. The fact that Airbus and Boeing had already taken so many orders for the A320neo and the 737 MAX played against any move in this direction.